Good day, and welcome to the FGI Industries Fourth Quarter 2023 Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Paul Bartolai, Managing Director of Vallum Advisors. Please go ahead.

Thank you. Welcome to FGI Industries fourth quarter and full-year 2023 results conference call. Leading the call today are President and CEO, David Bruce; and Chief Financial Officer, Perry Lin. We issued a press release after the market closed yesterday detailing our recent operational and financial results. I would like to remind you that management's commentary and responses to questions on today's conference call may include forward-looking statements which, by their nature, are uncertain and outside of the Company's control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may differ materially. For a discussion of some of the factors that could cause actual results to differ, please refer to the Risk Factors section of our latest filings with the SEC. Additionally, please note that you can find reconciliations of historical non-GAAP financial measures in the press release issued yesterday and in the appendix of this presentation, which is available on the Company's website. Today's call will begin with a performance review and strategic update from David Bruce, followed by a financial review from Perry Lin. At the conclusion of these prepared remarks, we will open the line for your questions. With that, I'll turn the call over to Dave.

Thanks, Paul. Good morning, everyone, and thank you for joining our call today. I'm extremely pleased with our solid fourth quarter results and improved momentum as we enter 2024. We have seen inventory levels normalize and we experienced improved order trends across our key businesses during the fourth quarter due in large part to the investments we made in our organic growth initiatives throughout the year under our brands, products and channels or BPC strategy. The improved order momentum has carried into the early months of 2024, further bolstered by the resoundingly positive reception from customers to our groundbreaking products and engaging presentation at the recent Kitchen & Bath Show in Las Vegas, the largest event of its kind in North America. This recent success has not only reaffirmed our standing as a leader in the industry, but has also propelled us to new heights. Our participation in the Kitchen & Bath Show was marked by the unveiling of our latest designs and technological breakthroughs, including our FlushGuard anti-overflow toilet designs, which garnered accolades by winning two prestigious awards. The enthusiastic response from attendees at KBIS has sparked considerable interest and anticipation, further cementing our reputation for innovation and excellence. These recent events give me continued confidence. We are on track for significantly improved results in 2024. We experienced solid growth trends across most of our business portfolio during the fourth quarter, driven by improved order momentum, generally stable end-market demand, and normalization of inventory levels. Each of our business segments showed year-over-year growth during the fourth quarter other than our Bath Furniture segment, which continues to be impacted by demand weakness and a trade down to lower-priced offerings. Total revenue ended down 2.6% in the fourth quarter. Our ongoing focus on higher-margin products drove another quarter of strong gross margin improvement with fourth quarter gross margin increasing roughly 550 basis points to 29.2%, our highest quarterly gross margin result as a public company. This drove a 20.1% increase in gross profit during the fourth quarter. While the inventory destocking headwinds had been obscuring much of the progress during 2023, we continue to make progress on our growth initiatives. It is very exciting to see these efforts begin to show through in our results during the fourth quarter, and we expect to see more of this in the coming quarters. On our first call as a public company two years ago, I introduced our long-term strategic plan to drive shareholder value that was based on driving organic growth through our BPC strategy, enhanced margin performance, and efficient capital deployment. While we faced many headwinds during 2023, I am very proud of our continued focus and execution against our strategic goals during the year. I would like to take this opportunity to walk through some of our key accomplishments during the fourth quarter and highlight some of our key strategic priorities for 2024. As it relates to our BPC program and our organic growth initiatives, we continue to make solid progress on our recently launched programs and new product offerings during the quarter. First, as we have discussed on recent calls, we entered into a licensing agreement that provides us access to an industry-leading overflow toilet technology, which we recently announced will be marketed as FlushGuard Overflow Technology. During the fourth quarter, we were awarded product placements at several large customers, including two of the largest commercial distributors in North America. We exhibited a new line of retail and commercial sanitary ware products featuring FlushGuard at the 2024 Kitchen & Bath Show. Additionally, FGI won first place at the highly coveted Design Bites competition at KBIS 2024 as the industry innovation with the biggest bite for its FlushGuard technology. Second, we continue to focus on initiatives to expand geographically with agreements providing entry into India, Eastern Europe, Australia and the UK. In the UK, we landed our first new customer partners in 2023, and we continue to build on these relationships with several major customer awards on the horizon in the UK, Germany, and India across both our retail and wholesale channels. In the last month, we have entered into agreements with three new distributor partners in India, and we are excited by the opportunity to grow our product penetration with these partners and take advantage of the vast growth potential of the Indian market. We look forward to continuing to grow our presence in these markets in the coming quarters and years. Third, we continue to execute on our recently announced program awards, including the online shower door program for an existing large Canadian retail partner that commenced in June 2023 and the rollout of our industry-leading shower wall program into as many as 300 locations of a large U.S. retailer. Our new Jetcoat Shower Wall products were a hit among the KBIS show attendees. We expect these programs to continue to ramp up in 2024, driving further momentum into the new year. Fourth, during the third quarter, we announced an in-store promotion with a large U.S. retailer that did not previously carry any of our sanitary ware products to lay the groundwork for future growth. I'm excited to report that following a successful promotion, we placed several new sanitary ware SKUs with this retailer, which featured the new FlushGuard Overflow Technology. We look forward to continued growth with this new partner in the coming years. Finally, our custom cabinetry business continues to grow rapidly. Our premium Covered Bridge brand added 203 new dealers during 2023, bringing our total active dealer count to 302 at the end of the year. We had a large display at the 2024 Kitchen & Bath Show that showcased our Covered Bridge custom kitchen cabinetry line and the enormously positive feedback we received at the show gives us confidence that Covered Bridge has increasingly strong growth momentum, all while contributing to the highest average gross margins across any of our product segments. We are also pleased to announce that Isla Porter, our new digital custom kitchen cabinetry business has recently announced its soft launch with an official launch anticipated in the spring of 2024. By leveraging industry-leading AI software with our existing custom kitchen operations infrastructure and an unmatched commitment to premium on-prem products, we believe Isla Porter will reach new heights in terms of cabinetry personalization, convenience and design. We are very excited by our progress on our strategic growth initiatives, which we expect to be a key driver of our improved results in 2024 and should help us drive above-market organic growth in the coming years. The second focus of our value creation strategy is on operating efficiency and driving margin expansion. We reported another quarter of strong year-over-year gross margin improvement driven by our strategic decision to focus on higher margin categories. For the full-year 2023, we reported gross margin of 27.4%, up nearly 800 basis points from 2022 despite the revenue headwinds. Finally, our third focus is on efficient capital deployment. We made meaningful progress during 2023 and reducing our working capital usage, which resulted in improved free cash flow conversion and lower net debt levels. While debt repayment and investment in organic initiatives have been our main priority, we continue to evaluate opportunities for strategic bolt-on acquisition opportunities. As we survey 2024, we are excited by the growing momentum in our growth initiatives. The demand environment for the home improvement market remains uneven with several industry forecasters predicting modest declines in repair and remodel spending in 2024. However, as Perry will discuss when he covers our 2024 outlook in more detail, based on the progress of our recent product launches and new programs under our BPC strategy, we are confident we can generate above-market growth in 2024. While we faced many market headwinds during 2023, I'm extremely proud of our team and our continued focus on our long-term strategic objectives. This has positioned the company for a solid year in 2024 and continued success in the coming years. With that, I will turn it over to Perry for a more detailed review of our financials.

Thank you, Dave, and good morning, everyone. I will provide some additional details on the quarter, give an update on our liquidity and balance sheet, and wrap it up with our full-year 2024 guidance. Revenue totaled $31 million during the fourth quarter of 2023, a decrease of 2.6% compared to the prior year, driven by continued end-market demand weakness in the Bath Furniture market, partially offset by growth in sanitary ware, shower systems, and kitchen cabinetry. Looking at our business line, sanitary ware revenue was $20.6 million during the fourth quarter, up 1.8% from last year due to improved order patterns as our new programs are beginning to benefit results. Bath Furniture revenue was $2.5 million during the fourth quarter, down from $6.1 million in the prior year period. The Bath Furniture market continued to be impacted by macro headwinds and trade-down to lower ticket products. As we have discussed previously, we are launching a product offering in the mid-tier category to better address current demand and hope to see improved trends in the incoming quarters. Shower Systems revenue was $5.7 million during the first quarter, up 55% from revenue of $3.7 million last year. The main trend in the shower category remained steady, and our recently launched program is building momentum. We continue to expect this new program to drive improved trends into 2024. Other revenue, which consists primarily of the custom kitchen cabinetry business was $2.1 million during the first quarter, up from $1.7 million last year due to continued dealer growth and new product launches. Gross profit was $9 million during the first quarter, an increase of 20.1% compared to last year, driven by strong growth in our higher margin product. As a result, gross profit margin improved to 29.2%, up roughly 550 basis points from the prior year. We expect our full-year 2024 gross margin to be consistent with our strong gross margin performance generated during the full-year 2023. Our operating expenses increased to $7.8 million during the first quarter, up from $6.5 million last year due to ongoing investment in our growth initiative, including marketing spending for the recently launched FlushGuard Overflow toilet product line and expenses tied to new custom kitchen cabinetry business development opportunity. GAAP operating income was $1.2 million during the fourth quarter, up 20% from income of $1 million last year. Excluding certain non-recurring expenses, adjusted operating income was $1.4 million during the fourth quarter. The increase in operating income was a result of our gross profit growth, partially offset by higher operating expenses tied to growth initiatives. Adjusted operating margin was 4.4% during the fourth quarter compared to the same period last year. GAAP net income was $0.5 million or $0.05 per diluted share during the fourth quarter of 2023, down modestly from the same period last year. Now turning to balance sheet and our liquidity. As of December 31, 2023, the company had $7.8 million of cash and cash equivalents and total debt of $7 million. At the end of the quarter, we had $16.6 million of availability under our credit facilities, net of letters of credit. Combined with cash, total liquidity was $24.4 million at quarter end. We believe we are in a solid liquidity position that is more than sufficient to fund our growth initiatives. Finally, turning to guidance, as our growth investment continues to gain momentum and inventory levels have normalized, we expect to return to organic growth in 2024 despite our expectation that end-markets are flat down modestly. In addition, we expect to continue to increase our growth investment to take advantage of attractive opportunity under our BPC strategy. Based on this factor, we are providing initial 2024 guidance for revenue in the range of $115 million to $128 million, adjusted operating income in the range of $2.8 million to $3.8 million and adjusted net income of between $1.2 million to $2 million. Please note that the guidance for the net income and adjusted operating income is provided on an adjusted basis and excludes certain non-recurring items. That completes our prepared remarks. Operator, we are now ready for the question-and-answer portion of our call.

We will now begin the question-and-answer session. Our first question comes from Reuben Garner with The Benchmark Company. Please go ahead.

Thank you. Good morning, guys.

Hey. Good morning, Reuben.

Good morning.

So a pretty strong outlook from a topline perspective this coming year despite what seems to continue to be kind of a sluggish environment, at least on the retail front. Can you talk about what your end market assumptions are within this outlook? And then you've got a lot of moving pieces with new business and new geographies and new customers. Is there any way to quantify just how much you have kind of within your control over the next 12 months?

Yes. It's a good question. Thanks. Yes, I mean, we've been talking for some time about our ability or at least our intent to grow organically initially, especially with a lot of newer businesses, executing the BPC strategy with newer products which we highlighted today as an example, our recent technological advance in the toilet. In addition to that, our channel expansions, which we've talked about with Europe and India. And as far as how that relates to what we see in the market, as we mentioned, the market – there's a lot of market forecasting right now that is looking at the – particularly the R&R market as being flat or down low to mid-single digits. But our expectation is based on the new programs that we're starting to execute, which you saw some of the results of that in Q4 that we should be able to outpace that down or estimated – moderating market by taking some share and instituting new programs, which will give us incremental new business opportunities. And that's, again, some of that was sort of impacted as we – if we go back to the end of the prior 2022 into '23 with destocking, right? And we talked about that. We don't see that having any material impact on our business in 2024. So again, it's a matter of timing and execution on these new programs, which have started to impact our business positively. And that's how we sort of see the balance between our organic growth with those new programs and also in the face of a flat to slightly down market overall.

Okay. Great. And then can you talk about how pricing has, I guess, trended or what the full impact of pricing was in 2023? And sort of what expectation is embedded in your outlook for 2024?

Yes. We don't anticipate that pricing is going to be a material impact either way. In 2024, adjustments were made in 2023. As we know, a large portion of pricing in 2023 emanated from freight costs. That being said, freight has ramped up a bit so far this year. We're going to keep an eye on that. Our belief and our estimates are that things should even out as we go through the middle part of the year. And there's no way to guarantee that price won't come into play should cost elevate. But as of our outlook into 2024, at this point, we don't anticipate price playing a major factor either way.

Okay. And then a two-part question here on your operating expenses. Last year, I think, was kind of viewed as a year of investment despite a tough end market. It looks like your – if I'm doing the math correctly, kind of sustaining that level of spending this year. Am I thinking about that the right way? Was there any one-time expenditures last year that are maybe a little bit more permanent or they're just new one-time expenditures? And the second part of the question is how do we think about that long-term in terms of your percentage of revenue? I mean when you first came public, it was in the mid-teens. Now it's been kind of consistently in the mid-20s over the last couple of years or last year and it sounds like going into this year. Is that something that will trend back lower at some point? Or are you more focused on kind of the investments to grow and to drive that higher gross margin than you've got?

Yes. You just finished on what I was going to sort of lead into. So you're 100% correct. And we've cited the fact that our gross margin expansion is sort of muted when you look at the OpEx impact to our growth. But that's exactly what we're trying to do. We're not necessarily on – I'm not necessarily targeting a percentage per se right now. The key is that we're trying to prepare ourselves for the growth that we're investing in. And we know that – and I can't give you a particular number, but we know we can scale this business well beyond where we're at today with the majority of the infrastructure we have in place now, right? So we're sort of prepping ourselves for that in some sense, if you want to call it that. Some of those investments are obviously tied directly to new business opportunities, expanding into Europe, expanding into India, the new digital kitchen venture, for example, and marketing for our new toilet innovation. So those are things that we're going to – that we're investing in, and a lot of those, you won't see when it comes to expansion in geographical markets, as we've already pretty much delved into that, there will be marketing expenses related to that, but that will all be commensurate with new business. So the answer – the overall answer to the question is as we scale the business with the infrastructure we have in place, the percentage of the OpEx will slowly drop because we believe we have a lot of elasticity between the investment right now, a lot of operating leverage between what we have in place versus where we can go with that.

Yes. I think, Reuben, while we are looking at our OpEx, our goal is to drive the gross margin dollar, also maintain a reasonable OpEx spending. The endgame is to increase our operating income percentage. That's what we are doing currently and in the future.

Great. Thanks guys. Congrats on the close of the year and good luck in 2024.

Thanks.

Thank you.

Our next question comes from Greg Gibas with Northland Securities. Please go ahead.

Hey. Good morning, David and Perry. Thanks for taking the question.

Good morning.

If I could follow-up on the gross margin side. Really nice, I mean, I think you said highest gross margin in the company's public history, 550 basis points year-over-year. What were the primary drivers of that improvement? And do you view those improved margins as sustainable? Or do you kind of see upside from here? Just kind of wondering how you expect those to trend and where you're seeing maybe opportunities for improved margins.

Sure. Yes. That's a good question. So yes, in the short-term, I think I mentioned in the release that we definitely anticipate that we'll be able to maintain our gross margin posture – as far as what we averaged in 2023, we did have a great Q4. I'm not sure that the Q4 number is a realistic sustainable gross margin for 2024. However, that being said, we do expect to continue to grow our margins because a lot of our growth is coming from higher margin categories, which we've emphasized a lot. Kitchens is probably the best example. That's our highest margin business that we have. We continue to expand. I mean, the reaction to our kitchen exhibition at KBIS was phenomenal. Our shower business continues to grow. We keep adding new products, growing the margin there. And then as we've talked about over the last couple of years, dollars and gross margin dollars are a key focus for us as well. And as a lot of the sanitary ware shakeout in the industry moderates as far as inventory levels and ordering cadence. As we see that come back to life, that's going to contribute to the dollar side as well. So as we scale the business, we really do feel that we'll be able to improve gross margin going forward in the short and the long-term.

Great. Makes sense. Cool. And then I wanted to follow-up. I know you talked about this for several quarters now, but what categories – or I guess, exactly what categories are you seeing destocking maybe persist longer than you anticipated or even worsen, but maybe where are you seeing some improvements? Just wondering if you could address those dynamics.

Yes. I mean I think I just briefly mentioned. We don't really see any material impact to our results this year from destocking. The destocking has pretty much normalized across the industry. That being said, it doesn't mean – there's local little small pockets at certain customers with certain categories. But from a material aspect to our business, it's going to be minimal. I think the difference this year, and I think I touched upon this on last quarter, retail and wholesale, while their inventory levels have normalized, they're also looking at a more conservative base level inventory. So that's just cautionary based on what I mentioned earlier, as they know that the market, their forecasts are flat to slightly down. So their inventory levels are going to be looked at with a little more scrutiny. So I don't think you're going to see the big spikes, obviously, that we saw in 2021 and 2022. And everybody frets over that when they go through something like that. But that being said, there's no abnormality to what I believe we're going to see from an ordering perspective. It's just going to be a little bit more conservative with a little bit lower inventory levels. But for the most part, everybody is sort of there. So I think that was the key. The middle of last year, people weren't there yet, and the destocking was impacting order cadence. But I think as we've headed into this year and as we go into the middle part of the year, I think you're not going to hear us talk about destocking as an impact on the business.

Okay. Sounds good. And I guess lastly, just to follow-up on your commentary on strategic bolt-on opportunities. What types of opportunities are you thinking about or evaluating? And do valuation multiples make sense in a way or are reasonably attractive?

Yes, I think it's a good question because we had 1.5 years ago, there was a little bit more, what I would call a flurry of activity with opportunities that came across our desk. We came close on 1 or 2. They didn't pan out and didn't meet some of the requirements that we had set for ourselves. And then it got quiet. And I think, obviously, it got quiet because 2023 was sort of a rough year for people again with inventory destocking and just a very uneven market. But we are engaging in some more conversations today. And I think when you look at the multiples, yes, it's going to – you have to look at some historicals. It's been a rough couple of years to sort of gauge what the value of a company is. So I think part of our strength here is that we are not looking to add bolt-on opportunities for companies that are outside of our, what I would call, our categorical dominance, which is bath and kitchen, right? So many of the companies that we might look at are related to our industry, quite tied in, if it's not the same product, it's a related product category, maybe in a different channel. So I think we have enough information based on our industry experience and then, of course, with Perry reviewing the financials and looking at how we're going to judge those multiples, I think we'll be able to make wise decisions as we move forward. And hopefully, like I said, we've been a little bit more involved in the last several months. So hopefully, something will come to fruition.

Got it. Thanks for the color.

Sure.

This concludes our question-and-answer session. I would like to turn the conference back over to Dave Bruce for any closing remarks.

Thank you for the time and interest today. We appreciate your continued support of FGI. Stay well, and if we don't connect during the quarter, we look forward to speaking with you on our next quarterly call. Thank you.

Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.